News

Intel's factory expansion plans trouble analysts

By Steve Johnson sjohnson@mercurynews.com

Posted:
01/18/2013 02:36:57 PM PST

Updated:
01/18/2013 02:52:39 PM PST

Besides reacting poorly to Intel's (INTC) recent drop in profit and tepid sales outlook for 2013, some Wall Street analysts Friday were deeply troubled by the company's plan to spend about $13 billion on its chip manufacturing operations this year.

The money will be used to expand and modernize its existing factories, and build new capacity to make chips on state-of-the-art semiconductor wafers, which are larger and more economical to use than the current version.

Many experts attribute Intel's ability to remain the world's biggest chipmaker on its prodigious and highly advanced plants, which it calls "fabs."

"We need those factories," CEO Paul Otellini said during a conference call Thursday to discuss the company's earnings report. "Those leading-edge fabs are the single greatest asset we have."

On Friday, Intel spokesman Jon Carvill explained that the company is anticipating it will have plenty of customers for the chips those plants will make.

"As we enter 2013 we're now in a space where the computing market is growing overall" with ultrabooks, tablets and other chip-powered gadgets, he said, noting "we're very well positioned in all of those segments." Moreover, he said, "we also continue to have a strong data center business that will continue to grow in 2013 as well."

Advertisement

In addition, Ambrish Srivastava, an analyst with BMO Capital Markets, speculated that Intel may be able to generate additional revenue by using some of its plants to make chips for other companies.

But many other analysts are worried about Intel, whose shares dropped $1.43 -- more than 6 percent -- to close Friday at $21.25. For one thing, the corporation has had trouble getting its chips into the fast-growing tablet and smartphone markets. And while Intel's brainy processors are used in about 80 percent of personal computers, PC sales are slowing as consumers increasingly switch to more mobile devices.

Consequently, a number of Wall Street experts expressed concern that Intel is being overly optimistic about how easily it will be able to sell the chips it will make in its expanded factories.

"We just do not see why Intel needs to spend massive amounts on capacity," groused Raymond James analyst Hans Mosesmann, noting that the $13 billion is 18 percent more than it spent in 2012 and 20 percent more than in 2011.

And J.P. Morgan's Christopher Danely predicted Intel won't be able to "generate sufficient demand to fill its increased capacity," adding, "we believe the company is too optimistic in its growth expectations."

Contact Steve Johnson at 408-920-5043. Follow him at Twitter.com/steveatmercnews.